One of the first choices an entrepreneur has to make when she decides to start a business is choosing which business entity is right for her. If she is opening a business by herself (meaning without any additional partners or business owners) then she has four options to choose from: a sole proprietor, a single LLC (or PLLC), an “S” corporation or a “C” corporation. Because starting a corporation involves greater paperwork and cost, solo business owners with limited funds and resources often choose between a sole proprietorship and a Single LLC (or PLLC).
These two choices are similar, and in both cases the entity is taxed as an individual, but it is important to be aware of the differences when deciding if one of these options is right for you.
What are the differences between these two options?
Paperwork and Fees
Sole Proprietors do not have to fill out any paperwork or pay any fees to begin doing business under the name of the individual business owner. The business owner can simply hang a shingle outside her door and begin operating. Individuals doing this should, of course, be aware if there are any licensing requirements for the type of business they are undertaking.
To form a Single LLC the individual business owner must file with the Secretary of State, publish notice in two newspapers, and pay a fee to the State of New York.
Liability
In the case of a Sole Proprietorship, both the business and personal assets of the individual owner are exposed and could be accessed in order to pay off outstanding business debts. In other words, the sole proprietorship offers no protection of the business owner’s assets.
The personal assets of the owner of a Single LLC are protected in commercial matters, and only the assets of the LLC are exposed to commercial liability.
Liquidation/Merger of the Business
A Sole Proprietor may simply cease doing business and does not need to alert the government.
The owner of a Single LLC must terminate the LLC by filing a notice with the State in order to dissolve the entity.
Being aware of the differences between these two common choices allows a solo entrepreneur seeking to start a small business the power to decide what is right for her organization.